Good morning everyone and welcome to the National Bank Holdings Corporation 2019 First Quarter Earnings Call. My name is Mariama, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation.

As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain Forward-Looking Statements, including statements regarding the Company's loans and loan growth, deposits, strategic capital, potential income streams, gross margin, taxes and non-interest expense.

Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors, which are disclosed in more detail in the Company's most recent filings with the U.S. Securities and Exchange Commission.

These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney..

Thanks Mariama. Good morning and thank you for joining National Bank Holdings’ first quarter 2019 earnings call. I have with me our Chief Financial Officer, Aldis Birkans and Rick Newfield, our Chief Risk Management Officer. I will begin by thanking my teammates for their continued focus on building full relationships with our clients.

We genuinely believe in creating win-win solutions for our clients and our bank, and the results are positive. We are off to a solid start with record quarterly earnings of $0.60 per share. Our focus on providing fair and sample solutions while offering uniquely personal service field annualized loan growth of 16.3%.

Equally important, the loan growth continues to be very diverse and granular in nature. This has translated into solid credit metrics with annualized net charge-offs of just two basis point. With the growth of full client relationships, we realized spot transaction deposit growth during the quarter of 20.9%.

Notably, we saw our non-interest-bearing demand deposits to total deposit mix actually improved during the quarter.

Now if there was a negative for the quarter, it was the delayed closing of some of the previously acquired OREO, we actually absorb the bulk of the related OREO expense during the first quarter, but now do not expect to realize those gains until the second or possibly the third quarter of this year.

So, on that note, I'll turn the call over to Aldis to cover the quarter in more detail. Aldis..

Alright. Thank you, Tim and good morning. As Tim mentioned, we are very pleased with our record earnings of $18.9 million for the first quarter of 2019 and recorded earnings per diluted share of $0.60.

Our earnings results were driven by expanded net interest margin, strong loan and deposit growth, which resulted in a solid net interest income increased along with low credit cost and continued focus on expense management. After the first quarter’s results, we are happy to reaffirm our full-year 2019 guidance that we provided on the last call.

And as always our guidance does not include any future interest rate policy changes by the Fed. During the first quarter, we outpaced our plans loan growth by growing originated and acquired loan balances at a solid 16.2% annualized rate.

The growth during the quarter is a continuation of the strong momentum built in the latter part of 2018, and continues to be well balanced across various asset classes, geographies and industry sectors. The first quarter's loan fundings were $311 million or 49.3% higher than the same quarter last year.

The newly originated loan fully taxable equivalent rate was 5.4%. This year is off to a great start and our loan pipeline look strong. As a reminder our full-year loan growth guidance was to 8% to 10% and after the first quarter’s strong performance, we feel comfortable guiding towards the upper end of this range.

Of course we are mindful of the guarder ships in the economy and the flat yield curve, but at this point our markets continue to perform better than the national averages, and while our clients remain cautious define activities strong during. Turning to deposit.

Our first quarter still average transaction deposits were essentially flat on a linked quarter basis.

We are happy with the progress we make into our commercial, small business and retail clients to grow our relationships as measured by the non-interest-bank checking account balance growth, which increased 1.4% on a linked quarter basis, and 4.8% over the same quarter last year.

We are seeing good momentum in our deposit strategy and the transaction deposit balance growth has picked up throughout the quarter, as evidenced by the spot transaction deposit increased of $178.3 million or 20.9% annualized on a linked quarter basis. I’m also pleased to report that our loan-to-deposit ratio remain flat to the prior quarter at 90%.

The first quarters transaction deposit cost was just 35 basis points, and as we had guided before increased four basis points on a linked quarter basis, as the 2018, the rate hikes continue to work their way through the deposit base. The total cost to deposit cost was 58 basis points.

With the rest of 2019, we are reaffirming our full-year guidance for transaction deposit growth into mid-single digit with current deposit staying relatively flat resulting in full-year total deposit growth in the low single digits.

The fully taxable equivalent net interest income totaled $52.4 million and increased on a linked quarter basis, despite two fewer days in the quarter. This is a result of strong fourth and first quarter loan growth, as well as an expanded net interest margin.

During the quarter our fully taxable equivalent net interest margin widens six basis points to 4.05%. Looking ahead, similar to last year, we expect the residential mortgage held for sale portfolio to increase during the summer months, thus putting downward pressure to the second and third quarter net interest margin calculations.

As such, we are reaffirming our prior guidance for fully taxable equivalent net interest margin to remain slightly above 4% for the rest of 2019, and we project no change our targeted year-end earning asset levels of $5.3 billion to $5.4 billion. We are also off to a strong start relative to loan quality.

Provision for loan loss expense was $1.5 million for the first quarter, driven by the strong originated loan growth.

Net charge-offs for the quarter, were just two basis points annualized and the outlook for asset quality remains favorable driven by our disciplined adherence to our self-imposed concentration limits and our credit underwriting standards.

For the next three quarters of 2019, we are guiding our provision expense to be in the range of $9 million to $10 million, as we expect to cover both the future originated loan balance growth at 1.1% to 1.2% coverage and net charge-offs for the remaining three quarters at about 15 basis points annualized.

The first quarters non-interest income of $17.1 million was $1.7 million higher than in the fourth quarter 2018. The linked quarter increase in non-interest income was primarily driven by the residential and mortgage gains on loans sold.

And with the increasing seasonal residential mortgage activity during the summer months, this puts us on a path to achieve the full-year non-interest income guidance of $70 million to $72. Regarding expenses, our first quarter’s non-interest expense totaled $44.4 million and increased $1.5 million from the prior quarter.

The linked quarter increase was primarily driven by a $0.9 million seasonal increase in salaries and benefits due to higher commissions and payroll taxes, as well as $0.5 million higher problem asset workout and OREO expense.

However, as we have mentioned previously, we expect OREO gains later this year to offset the problem loan and OREO expenses realized for the full-year. Reiterating our non-interest expense guidance. We still expect our full-year expenses to be within the previously guided $183 million to $185 million range.

The Utah expansion initiative, annual merit increases, as well as the seasonal increase in mortgage activity will lead to higher compensation expense in the coming quarters. As always, we continue to focus on improving our efficiency and we will aim to come in at the lower end of the range.

The effective tax rate for the quarter was 15.1% and included $0.8 million benefit related to stock compensation activity. Excluding this, the effective tax rate for the quarter was 18.5% for the rest of 2019 we expect the effective tax rate to be in the previously guided 18.5% to 19.5% range.

As it relates to capital, we finished the quarter with a 10.6% Tier 1 leverage capital ratio and the tangible book value per share increased to $19.31 driven by our record earnings. Tim that concludes my comments..

Thank you, Aldis. Aldis has covered in detail what I believe was a strong quarter. So I'll go ahead and open up the call for questions and the Mariama ask you to open up the lines..

Certainly. [Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson. Your line is open..

Good morning Jeff..

Thanks good morning Tim.

Yes, I was hoping Tim just to get an update on the Colorado M&A scene, you had lots of activity in 2018 and I guess have been quiet of late, just wanted to check in with you on discussions of way there were kind of within the market, what you are hearing?.

We are going to continue to focus on being intelligent stewards of capital. I will say if you look at our entire footprint, we are seeing opportunities, we are primarily focused on privately held institutions.

We enjoy working with what we consider to be savvy sellers who appreciate the opportunity to strike an intelligent deal that upon announcement will be well received by the marketplace. Recognizing that if they are taking our shares, and we are announcing a smart deal then they are going to see those shares trade up day one.

So day one premium is not as important necessarily as the shares they are going to hold long-term. Working with private owners of banks that have the flexibility in the far site to work that way is paid-off for prior partners we have worked with and we think it will pay-off for future partners.

So I can't say much more than that, but the we will continue to confine ourselves to the kind of returns and earn back standards that we have held ourselves to in the past..

Okay. And maybe just the related - trying to get a post on your feel on kind of out of market entrance and then kind of the second part of that question is are you seeing any shakeout from deals.

I would focus more on Colorado, but even in New Mexico and Kansas City call it, where there has been some deal activity, you are seeing some shakeout and again what do you think the appetite has it slowed from outer market entrance from your perspective?.

Well. As Aldis mentioned in his comments, we continue to benefit from operating in some of the better performing markets economically in the United States and so there continues to be a great deal of interest from outside parties in these markets. I think that's for obvious reasons. I think that's smart on their part.

As it relates to the first part of your question, and the shakeout, frankly we continue to benefit most from the opportunities we see from the larger institutions and I'm talking about the larger three or four institutions, and that shouldn’t really surprise folks.

If you look at their historical market share, the kind of change that tends to go on those institutions, we should be taking market share there and we are. So that is our opportunity and that is what we are working to take advantage of..

Okay, maybe the last one. Just on capital then, you are seeing some the highest levels and about it a year and a half here and we have seen dividend hiked up a bit in the last few quarters.

Just wanted to kind of get your capital deployment maybe waterfall or priorities, I guess funding organic growth, but then you look into dividend, anything else you are looking for as far as deploying capital? Your thought there..

Right. I think you nailed it with the first two points. Certainly first and foremost, funding organic growth. Second, continuing to support ideally a semi-annual dividend increase. Third, being opportunistic with M&A.

Fourth, recognizing that we are long in this cycle and we believe that if we are four to five going into some kind of downturn, when and if that happens that that will bode well as it relates to opportunities and a downturn.

On a related note, if no one ask, I will ask Rick to talk about the way we view our loan book and the way we stress test our loan book and view it in a severe stress scenario.

I think strong capital base coupled with the balance sheet we have built or more specifically the loan book we have built, I think positions us well to take advantage of a downturn. So that is how I would break it down..

Okay. Thank you..

You bet. Thanks for the questions..

Your next question comes from Tim O'Brien with Sandler O'Neill Partners. Your line is open..

Good morning Tim..

Good morning Tim, good morning guys. Just a follow-up on the comments you made about the bulk of expense hitting on the OREO disposition and the benefits coming in the second or third quarter.

Could you give a little more - can you share some detail on that Tim kind of what - that is curious set of circumstances here I would love to hear a little bit more about that and I guess what it might mean as far as operating expense or the - kind of book what line that is going to show up and get a little more detail there?.

Yes.

Rick do you want to take that?.

Sure, hey Tim, good morning Its Rick. Look overall, we have said this for some time and evidenced it in past years, OREO remains a profit center for our Company.

We have actually had several OREO properties under contract for some time with very nice gains, as Aldis said, we expect those gains to do no less than cover the full-years OREO in problem loan expenses.

As we have said before, they are lumpy and as all this indicated and Tim alluded to, we see those gains in second and third quarter here and again that is probably the most de-talk in share other than there are significant gains that we would realize..

And of course Rick and Aldis are approaching that conservatively, as I have asked them to Tim. You know this Tim and those that have followed us for some time know this. But for those that maybe newer to the name, I just want to remind everyone that what we are talking about here is OREO that came out of acquired problem institution.

So when Rick talks about, it is a profit center, these were deeply discounted longs in OREO, and net-net the economic returns on these assets have been tremendous. And when I look at the landscape over the course of 2019, I see a nicely creative position to capital.

Again, we are not talking about core earnings, just to be clear, but when I think about it in terms of just the contribution to capital building on the prior discussion. I see a nice contribution over the second and third quarter.

What we are talking about to be very specific is the final resolution of some fairly meaningful pieces of property being sold that have been held for some time..

And the booked value of that property as you are carrying it now is that is nine million?.

Our total OREO is just over $9 million, we are talking about a subset of those properties that are under contract and are positioned for very nice gains..

Got it. And then just changing gear, one last question. Trialing four quarter before this quarter growth in non-interest-bearing DDA was much less substantial than this quarter’s growth that was kind of in my view, one of the highlights of several obviously of the quarter.

Could you give a little bit of color on what was behind that and if that is indicative of prospects you are going forward in that area..

You know, I will ask Aldis to fill in with a little more detail, but I will remind folks that I talked about number of relationships closing in the fourth quarter and there tends to be as those relationships close a trailing period for all of the treasury management and operating accounts to come online.

So part of what you saw in the first quarter was the benefit from fourth quarter activity as well as stronger than expected first quarter.

Having said that Aldis any additional color you would add?.

Exactly right.

It’s the relationship that we have been mentioning about and working on for several quarters now, obviously we continue working on new ones and growing that part of the deposit book on a go forward basis as well, but this quarter was a combination of relationship that we closed and starting funding in from the quarters before, as well as the new people with new accounts being brought on..

It just gives me the opportunity Tim to thank my teammates again for their focus on really serving the full relationship with our clients and I think one thing that we are doing uniquely well with our incentive system that really reward our bankers for growth and direct contribution which is a proxy for net income, which is the way we all reward ourselves as shareholders is their recognizing that they can grow that direct contribution just as strongly, and at times even more robustly with the growth of treasury management and deposit business than they can with loan business certainly on a risk adjusted basis.

So having that kind of alignment of incentives with the growth of full relationships continues to be a strong force for us, but again I will just thank my bankers for their focus on serving full relationships of our clients..

Well thanks for the updates on guidance and appreciate you answering my questions..

You bet. Thank you Tim..

Your next question comes from Chris McGratty with KBW. Your line is now open..

Hi Chris..

Hi. This is actually Kelly Motta on for Chris, how are you guys.

Just a point of clarification, your fee guidance for the year is that inclusion of the expected OREO gains you anticipate realizing later this year?.

It is not, the OREO again actually go into account for expense and the expense line item so D.C. side excluding OREO..

Okay, alright, thanks on that.

And then I was hoping to get an update on the Utah expansion maybe some more color there on how that is progressing?.

Right. Thanks for asking. I think we are actually stun the momentum there. I’m pleased to report that Utah contributed to our first quarter earnings off to a very solid early start and could not be more proud of the leadership there and we just couldn’t be happier.

I will say, consider this kind of the public service announcement, if there was an opportunity to make the right acquisition in that market, if there are interested sellers, we are interested in trading the right partnership there. We would love to help invest in the growth of the state of Utah..

Well that is good to hear. Maybe a last question on your margin outlook, it hasn’t changed because I believe you didn’t have rates in your prior outlook. Just wondering with the proportion of what do you have that are variable if you have taken any steps you mitigate down side risk with the possibility of the Fed moving or cleanly maybe this year..

This is Aldis, great question. We have been actually working on that for over a year now and mixing loan - marginal loans coming on at more a fixed rate than variable rate.

And what I'm talking about is more just three to five year fixed rate loans as posted anything longer than that and we have been bringing down our asset sensitivity in the light of the rate hike environment coming to an end over in a year and we will continue working on that this year as well..

Great. Thank you..

Thank you Kelly..

Your next question comes from Nathan Race with Piper Jaffray. Your line is open..

Good morning Nathan..

Good morning. This is actually Bob Shone on for Nate.

First question is, can you maybe talk a little about what were the primary contributors to the mortgage banking pick-up this quarter and maybe anything you see in the marketplace going forward?.

Yes, we just simply saw a higher level of lock so better activity in the quarter, earlier on than we expected.

I mean keep in mind, the way we think about residential banking is we expect - our challenge to the team is to breakeven or better in the fourth and first quarters and to really make our money to deliver all the profits for the year in the second and third quarters.

But Aldis, you may want to speak in more detail as to not only what we saw in the first, but the early activity we have seen as we entered the spring..

Yes and I will do that point on the first quarter, we are actually happy to report that mortgage business was accretive to our earnings this quarter as well.

So they did better than breaking even, they added to the value of the Company and as we starting off at April here in a strong note, I think the lower rate environment is obviously helping on the mortgages. But as a reminder, again, we are in very good market especially here in Colorado for purchase mortgages.

So, it's always easy to swim with the tide than against it..

That’s great color.

And then maybe could you talk a little about the loan pipeline as we head into 2Q especially after strong first quarter? Are there maybe any areas that you see as stronger or weaker?.

Look, the good news is we feel good about our pipeline and activity as we roll right into the second quarter. And Bob, I'll -- since I think it came up in your report, I will actually make one point of clarification as it relates to the diversity of the book I think. You guys may have appointed to kind of a heavier concentration in CRE.

I would point out and Rick you can jump in here, as a practical matter, a bulk of what we are talking about in terms of growth in that CRE, book in the first quarter was actually owner occupied. Furthermore to put in perspective, year-over-year, we actually saw our non-owner-occupied CRE decline.

I think what, Rick, around 8%?.

8%..

Furthermore, I think this brings it home at first quarter and our commercial real estate to total cap is right around a 100%.

What is it 101?.

101..

101% versus regulatory guidelines of course 300%, so I just want to stress that we continue to be very focused on building a diverse granular book. With that, Rick, anything you would add in terms of dimensions around what you're seeing in the pipeline today? Or what you saw in the first quarter..

Yes, I think you had an important point on non-owner-occupied commercial real estate. We continue to build strength as you know, Tim, in business banking and really granular small business loans and expect based on pipeline, to have an even stronger second quarter and that area.

In the past, I've talked about over granularity and we've generally been around $1 million for funded commercial loan, actually we're more granular in the first quarter about 700,000. So, again, I just would echo the comments you made. Our criticized and classified loans continue to trend down during the first quarter.

And I mentioned earlier, this stress testing, maybe at a high level, you could explain we are now into our third year while not require by the regulators. We run with a third party the equivalent of the regulatory required stress testing. You may want to talk about preliminary results we're seeing from a third year stress testing..

Sure, Tim. And as you said, we're not required to do. We actually do one internally to through quarter review team and then use a variable. We can serve very conservative and top third party to come in and do an annual test. They look at a significant portion of our commercial and business banking portfolio. It’s a bottom up approach.

And for that the second consecutive year, they've actually seen a de-risking, a decrease of overall loss rates ranging from a base case all the way to a very severe case.

And at a high level, we do that again to understand our optionality in the strength of our balance sheet if we go into that very severe case, which premier assumptions would be at or more severe than what we saw in the great recession..

Thank you, Rick. But I hope I may be giving you more than you asked for, but wanted to get that in..

Thank you. That is all the time we have questions. I will now turn the call back to Mr. Laney for his closing remarks..

Well, I certainly don’t want to limit any questions. So Marianna I’ll just check and make sure there are no other questions in the queue..

Yes, we have a question from Jeff Rulis with D.A. Davidson. Your line is open..

Tim, thank you you're reading my mind. On the -- I just want to clarify a couple of items.

Aldis, you mentioned -- was it the average earnings assets that you set was $5.3 billion to $5.4 billion?.

At period end $5.3 billion to $5.4 billion, so by year-end our earnings assets will be $5.3 billion to $5.4 billion..

Okay, got it. It's helpful..

The reason I give that guidance, so just to be very clear, again, the mortgage held-for-sale portfolio tend to increase during the summer months, right? And I don’t want anybody to a continuation as we will build that book here in second and third quarter.

So, it will come back down and that's why I am giving such precise guidance as towards the end of this year..

No, but very helpful. Appreciate it.

And then just to clarify on the, I guess, on the non-interest expense just, again, the problem workout expense you expect for the full-year to be fully offset by OREO gains, and both factors would be included in your 182 to 185 non-interest expense guidance?.

That's correct..

Okay, that was all I have..

Those two line items netting to zero, at least to zero, if not being a negative i.e. or positive to the reducing expense..

Gains exceeding the workouts cost, Alright, thank you, appreciate it..

And Jeff, I would just add that while I have no intent to overpromise, I think you can look at our track record on doing better than planned against expenses. And I certainly have high expectations of ourselves here in 2019..

You are in the whole by 800,000 or so, so I guess, it's going to be more positive picture in the closing quarter. So thank you..

Mariama, any other questions in the queue?.

I am showing we have no further questions at this time..

Okay, great. Then, I will just simply thank everyone for joining us this morning and we will be back to you with second quarter results shortly. Thank you very much. Good day..

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through May 8, 2019, by dialing (855)-859-2056 or (404)-537-3406 and referencing the conference ID of 8699564.

The earnings release and online replay of this call will also be available on the Company's website on the Investor Relations page. Thank you very much and have a great day. You may now disconnect..